Great Depression II – It Can’t Happen to Us, Can It? – Republished from May 2008 – with Addendum
Webster’s defines complacency as “1.satisfaction or contentment 2. smug self-satisfaction” There is probably not a better word to describe the current state of perception with regard to economic and financial malady. I had an interesting conversation the other night about exactly this topic and the individual I was speaking with had an overriding belief that we cannot suffer economically simply because the current generation is not prepared to deal with it. While I certainly agree with the latter assertion, the former continues to baffle me. I am certainly not prepared to deal with a lengthy hospital stay as the result of a horrific car crash, but that alone doesn’t cloak me in immunity from having an accident. The reasoning is so broken and flawed, yet it is often all we get in terms of a perception of what is going on.
This disconnect begets a discussion of why exactly it is that society has chosen to believe itself to be immune from bad things. It is odd in itself that when you talk to individuals, they seem to be acutely aware of many of the challenges facing us, but when you put all the individuals together and create a society, we act as though the party will indeed last forever. We are certainly dealing with a situation in which the intelligence of the whole is by far less than the sum of all its parts. Here’s a little bit of déjà vu for you, compliments of Wikipedia:
“In the 1920s, Americans consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture and the later for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.”
Sound familiar anyone? See any price deflation going on? The Wilshire 5000 has only lost about 2.5 TRILLION dollars in value in the last two months or so. What about the loss in home equity? Another trillion or two? Who knows, but I think you get the point. We are seeing almost to the final utterance the same play we saw unfold in 1929. Were those folks any more prepared for the Great Depression than we are today? I’d argue that while they were perhaps a bit better equipped to provide for their own sustenance, that American society in the 1920’s was as complacent as we are today. When the realization of history’s coup de grace hits, we will be caught as unaware as our ancestors were back in 1929.
Here are some other examples of what Alan Greenspan likes to call ‘irrational exuberance’ in the 1920’s:
“We will not have any more crashes in our time.”
John Maynard Keynes in 1927 (The authenticity of this one is a little suspect) DOW ~ 175
“There will be no interruption of our permanent prosperity.”
Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928 – DOW ~ 200
“There may be a recession in stock prices, but not anything in the nature of a crash.” – Irving Fisher, leading U.S. economist, New York Times, Sept. 5, 1929 – DOW ~ 375
“All safe deposit boxes in banks or financial institutions have been sealed… and may only be opened in the presence of an agent of the I.R.S.” – President F.D. Roosevelt, 1933 – DOW ~ 65
Tuesday morning we received news that according to the Institute of Supply Management, the service portion of our economy underwent a significant contraction during the month of December. This is alarming given the fact that December is normally one of the busiest times of the year. Even still, a trip past the local mall provides a busy scene. People are streaming in and out, carrying boxes and bags of imported trinkets to their imported cars. They will then use imported gasoline to drive to their home, the mortgage of which is likely to be owned by a foreign investor. Yet the average American citizen sees nothing wrong with this picture. Or could it be that they don’t even see the picture at all? The media has certainly been playing the role of absentee informant in recent years, choosing to focus on such insipid topics as Britney Spears’ latest rehab stint rather than the important business at hand.
Here now, are some quotes from this generation’s 1929..in 2007 and 2008:
“It is encouraging that inflation expectations appear to be contained,” Fed Chairman Ben S. Bernanke – Testimony to Congress – March 28 th , 2007 – DOW ~ 12,500, Headline CPI-U ~ 2.8% Y/Y
“As I think you know, I believe very strongly that a strong dollar is in our nation’s interest, and I’m a big believer in currencies being set in a competitive, open marketplace,” – Henry Paulson – Secretary of the Treasury – USDX ~ 81.50
““We are making history. What has passed the Congress in record time is a gift to the middle class and those who aspire to it in our country.” House Speaker Nancy Pelosi on the $168 Billion tax ‘rebate’ while the middle class is spending their Wal-Mart Christmas gift cards on food and other necessities.
They’re making history all right. Too bad it will end up being the WRONG kind. How can we ever hope to focus the population on the urgency of our current predicament when our leaders are willing to make it worse by handing our freebies, bailing out those who willingly make poor investment choices and telling us everything can be ‘free’ if we’ll only pull their lever on election day?
Or am I putting the cart in front of the horse? Perhaps a contrarian opinion might be that our leaders are giving the public exactly what it wants. In either case, I am quite certain that our state of unpreparedness will not constitute a free pass from the negative effects of a recession or a retraction of any of the financial excesses we’ve enjoyed over the past few decades.
Addendum – June 2023
Most people today don’t even remember Hank Paulson – or his ridiculous statements regarding the US Dollar. If a strong dollar was truly in our national interest, then we have no national interest left thanks to those fine, unaccountable feathered friends at the not-so-USFed. Poor Hank was like a financial piñata – no matter how many hits he took for this grossly erroneous statement, he kept right on spilling out candy.
15 years later and only the names have changed. The vocabulary-challenged Paulson is long gone, replaced by less than erudite Janet Yellen. Evidently one of the requirements of a Treasury Secretary or a not-so-USFed Chairman is to be able to speak for an hour and say absolutely nothing. Jay Powell is definitely at a disadvantage; he actually tries to explain things.
Economics isn’t rocket science. Or anywhere close. It’s a rather simple topic to understand. It is made complex by institutions who benefit when the population is clueless. When it comes to obfuscation, most policymakers get a AAA – ironically the same grade assigned to those worthless MBS back in the heydays of 2005-2007.